Reserve Bank liable to pay dividend distribution tax under I.T. law on dividends pay-outs to GoI - T. N. Pandey - Article published in Business Advisor, dated August 25, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume VIII Part 4 August 25, 2014 3 Business Advisor
Reserve Bank liable to pay dividend
distribution tax under I.T. law on
dividends pay-outs to GoI
T. N. Pandey
A report under the caption „Higher RBI Dividend may
keep rates in check‟, published in the Economic Times of
12th August, 2014 (Delhi Edition) shows that the RBI
proposes to transfer about Rs 53,000 crore surplus to
Government (up to two-thirds from previous year), to
ensure that interest rate are kept in check, because of
reduced borrowing requirements by the Government.
The issue requiring consideration is whether the RBI will
pay dividend distribution tax (DDT) also on this amount
@ 15% amounting to Rs 7,900 crore to the income tax kitty of the GoI.
Such an amount shall further increase the liquidity of the GoI and help in
advancing the objective for which the interim dividend of Rs 53,000 crore is
proposed to be paid.
However, past record of RBI shows that it is neither paying such tax to the
GoI nor the Income Tax Dept. is insisting for such payment from the RBI
while other taxpayers, owing much smaller amounts to the I.T. Dept. as tax,
are charged interest, penalised and threatened for prosecution in such
cases.
2. How the liability for tax arises?
Section 115-O of the I.T. Act, 1961 (Act) provides for tax on distributed
profits of domestic companies. The important elements for chargeability to
tax under the section are:
Section 115-O of the I.T. Act, 1961 (Act) provides for tax on
distributed profits of domestic companies.

2. Volume VIII Part 4 August 25, 2014 4 Business Advisor
The assessee concerned has to be a domestic company;
It must have declared, distributed or paid dividend – later, clarified in the
section as distributed profit – whether interim or otherwise;
Tax on such dividend, also referred to as tax on distributed profits, is to be
paid at the prescribed rate, i.e. 15% at present.
Sub-section (2) of section 115-O clarifies that notwithstanding that no
income-tax is payable by a domestic company on its total income…the tax
on the distributed profits under sub-section (1) shall be payable by such
company.
3. Whether conditions specified in section 115-O (supra) are satisfied in
RBI‟s case?
The first issue needing examination is whether RBI is a „domestic company‟
as mandated in section 115-O. The answer to this query has to be in the
affirmative for the reason stated in later paragraphs.
3.1 The RBI has been established by the RBI Act (subsequently amended by
Act 23 of 1997). S-section (2) thereof states, “The bank shall be a body
corporate by the name of the Reserve Bank of India, having perpetual
succession and common seal, and shall by the said name sue and be sued”.
3.2 Under sub-section (22A) of section 2 of the Act, a „domestic company‟
means an Indian company. Under sub-section (26) of section 2 of the Act,
the definition of „Indian Company‟ includes „a corporation established by or
under a Central, State or Provincial Act‟. Having regard to the definition of
„domestic company‟, as contained in the Act and also having regard to the
provisions in the RBI Act as to the establishment of the RBI, the Bank is a
domestic company for the purposes of the Act.
3.3 Because of the aforesaid factors, section 48 of the RBI Act exempts it
from payment of income tax and super tax (super tax is no longer imposable
The first issue that needs examination is whether the RBI is a
„domestic company‟ as mandated in section 115-O.

3. Volume VIII Part 4 August 25, 2014 5 Business Advisor
as a tax).
4. Whether payment by RBI to Govt. is dividend?
The aspect needing consideration is whether the proposed payment by the
RBI to the GoI is payment of (interim) dividend?
The reply to this query has also to be in the affirmative. Firstly, according to
ET‟s report (supra), Shri Raghuraman Rajan himself has termed such
payment as „dividend‟. However, even if it is argued that mere nomenclature
given to a payment cannot be determinative of whether the payment is
dividend or not even on facts and law, the said payment is dividend.
Sub-section (22) of Section 2 of the Act defines „dividend‟. Clause (a) thereof
lays down that „any distribution by a company of accumulated profits‟
constitutes dividend.
Thus, the amount appropriated to the Union Government by the RBI
becomes liable to distribution tax whether it is called „dividend‟ or
„distribution of profits‟.
U/s 47 of the RBI Act, the RBI is obliged to pay the „surplus profits‟ to the
Union Government. Such distributed surplus is nothing but „dividend‟.
Certainly, it is „distributed profits‟ for the purposes of section 115-O.
5. Whether (proposed) payment would be liable to DDT?
The immunity provided by section 48 of the RBI Act (supra) extends only to
income-tax (super tax being no longer leviable) on the income – profits or
gains – and not to any tax, which is leviable on distribution of income
exempt from tax even if it is labeled as „additional income-tax‟, but clarified
as „tax on distributed profits‟.
U/s 115-O, domestic companies are liable to pay tax on distributed profits
even if, as per sub-section (2) thereof, no income-tax is payable by a
domestic company on its total income. This provision makes it clear that tax
U/s 47 of the RBI Act, the RBI is obliged to pay the „surplus
profits‟ to the Union Government. Such distributed surplus is
nothing but „dividend‟.

4. Volume VIII Part 4 August 25, 2014 6 Business Advisor
on distributed profit is not income-tax. Therefore, section 48 of the RBI Act,
exempting the RBI from paying income-tax on its income, will not absolve
the bank from its liability to pay tax u/s 115-O of the Act. And, this would
subsist if such liability fastens on it as per sub-section (1) of section 115-O.
5.1 The RBI is liable to pay tax u/s 115-O in respect of the amount paid to
the Union Government out of its profits – current or accumulated. Every
year, the RBI pays substantial amounts to the Government as its share
consequent to section 47 (supra) but it is not paying any tax u/s 115-O,
which is apparently payable because it is not a tax on income.
5.2 It could be argued that paying dividend distribution tax by the RBI
would be a mere formality because all the profits of the RBI belong to the
GOI and it should not matter whether it is paid as „dividend‟ or as
„distribution tax‟. But such a view cannot absolve the RBI of paying dividend
distribution tax. No relief from DDT can be claimed on the basis of such a
view.
The RBI is an independent autonomous entity, having a personality of its
own – not a Department of the GoI. Hence, unless it is specifically exempted
by a provision in the RBI Act, it has to pay DDT. If the view that RBI is a
part of the GoI – not an independent body – is to be accepted, then there
could have been no need to have a provision, like section 48 in the RBI Act.
6. Summing up
Over the years, the judicial view had been that if the person sought to be
taxed comes within the letter of law, he must be taxed.
As per the Rowlatt J. in Cape Brandy Syndicate vs. IRC, 1 KB 64 ruling, in a
taxing Act, one has to look merely at what is clearly said. There is no room
for any intendment. There is no equity about a tax. There is no presumption
to tax. Nothing is to be read in, nothing is to be implied. One can only look
fairly at the language used.
6.1 Therefore, either the RBI should pay DDT (with interest for past years)
or the RBI Act may be amended retrospectively to exempt the RBI from
payment of DDT.
6.2 An urgent action is needed in the matter. The non-payment of DDT does
not augur well for the Central Bank of the country nor for the I.T.
Department, which is so particular in collection of income tax from the
defaulting assessees.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes)